Income Taxes
The provision (benefit) for income taxes for Fiscal 2017, Fiscal 2016 and Fiscal 2015 consists of the following (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
Current: | | | | | |
Federal | $ | (501 | ) | | $ | 20,923 |
| | $ | 30,696 |
|
State | (28 | ) | | 3,850 |
| | 5,385 |
|
Total current | (529 | ) | | 24,773 |
| | 36,081 |
|
Deferred: | | | | | |
Federal | (14,461 | ) | | (11,655 | ) | | (1,283 | ) |
State | (5,373 | ) | | (2,028 | ) | | (81 | ) |
Total deferred | (19,834 | ) | | (13,683 | ) | | (1,364 | ) |
Provision (benefit) for income taxes | $ | (20,363 | ) | | $ | 11,090 |
| | $ | 34,717 |
|
A reconciliation of the statutory Federal income tax rate and effective rate for income taxes is as follows:
|
| | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of Federal income tax benefit | 4.0 | % | | 2.5 | % | | 3.4 | % |
Impairment of goodwill | (25.5 | )% | | — |
| | — |
|
Revaluation of deferred tax assets and liabilities (1) | (5.6 | )% | | — |
| | — |
|
Write-off of Canada investment | (0.1 | )% | | (8.3 | )% | | — |
|
Other | (0.3 | )% | | 1.6 | % | | 1.1 | % |
Effective tax rate | 7.5 | % | | 30.8 | % | | 39.5 | % |
| |
(1) | The Tax Cut and Jobs Act of 2017 (“U.S. Tax Reform”) was enacted on December 22, 2017, reducing the statutory federal income tax rate from 35% to 21%, effective January 1, 2018. As required, the Company determined a reasonable estimate for certain effects of U.S. Tax Reform and recorded that estimate as a provisional amount. Due to the Company’s deferred tax position being a net asset, the provisional remeasurement of the deferred tax assets and liabilities resulted in a $15.3 million discrete tax expense which lowered the effective tax rate by 5.6% in Fiscal 2017. Our federal income tax expense for periods beginning in Fiscal 2018 will be based on the new tax rate. The provisional remeasurement amount is anticipated to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities primarily related to depreciable assets, inventory, employee compensation and commissions. |
Additionally on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the U.S. Tax Reform. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As such, the Company is reporting the impacts of the U.S. Tax Reform provisionally based upon reasonable estimates. The impacts are not yet finalized as they are dependent on factors and analysis not yet known or fully completed, including but not limited to, depreciation, additional effect of the rate change on the ending deferred balances and the issuance of additional guidance, as well as our ongoing analysis of the U.S Tax Reform.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 30, 2017 and December 31, 2016 are as follows (in thousands):
|
| | | | | | | |
| December 30, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 2,820 |
| | $ | 2,535 |
|
Deferred rent | 7,012 |
| | 10,775 |
|
Tenant allowance | 3,659 |
| | 3,938 |
|
Deferred sales | — |
| | 1,019 |
|
General accrued liabilities | 4,660 |
| | 7,132 |
|
Deferred wages and compensation | 1,594 |
| | 863 |
|
Inventory | 8,078 |
| | 7,443 |
|
Equity compensation expense | 2,582 |
| | 3,815 |
|
Debt | 583 |
| | 995 |
|
Trade name and goodwill | 10,850 |
| | — |
|
Other | 2,830 |
| | 2,735 |
|
| 44,668 |
| | 41,250 |
|
Valuation allowance | (2,820 | ) | | (2,535 | ) |
Deferred tax assets | 41,848 |
| | 38,715 |
|
Deferred tax liabilities: | | | |
Trade name and goodwill | — |
| | (15,590 | ) |
Accumulated depreciation | (3,078 | ) | | (4,589 | ) |
Prepaid expenses | (1,492 | ) | | (1,689 | ) |
Deferred tax liabilities | (4,570 | ) | | (21,868 | ) |
Net deferred tax asset | $ | 37,278 |
| | $ | 16,847 |
|
Management periodically assesses whether the Company is more likely than not to realize some or all of its deferred tax assets. As of December 30, 2017, with the exception of $2.8 million of deferred tax assets arising from a foreign and state net operating loss carryforward against which there is a valuation allowance (see above table), management determined that the Company is more likely than not to realize the deferred tax assets detailed above. Realization of deferred tax assets associated with the state net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration by tax jurisdiction.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, Puerto Rico and Canada. The Company recognizes interest related to uncertain tax positions in income tax expense. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2014 and for state examinations before 2011. However, the tax authorities still have the ability to review the relevance of net operating loss carryforwards created in closed years if such tax attributes are utilized in open years (subsequent to 2011).
The Company has domestic (U.S. state) and foreign net operating losses of approximately $15.5 million and $7.9 million at December 30, 2017, against which a full valuation allowance is recorded. Domestic net operating losses generated will continue to expire annually through Fiscal 2033. The Company’s foreign net operating loss is generated through operations in Canada, and will expire in Fiscal 2035.